Barneys looks at downsizing to survive bankruptcy

Bankrupt retailer Barneys New York was back in court Wednesday, aiming to finalize the debtor-in-possession financing needed to fund its reorganization.

The court date followed a whirlwind period marked by a report of a potential buyer and pushback from creditors over the luxury retailer's $217 million DIP financing deal with investment bank B. Riley Financial and hedge fund Brigade Capital Management.

The case—which began when Barneys filed a voluntary Chapter 11 petition Aug. 6—took a dramatic turn late last month as the creditors' committee objected to the terms of the financing package, which had received interim approval. In court papers, the creditors' committee, which includes landlords Simon Property Group and Flagship 660 Owner as well as vendors Prada and Chloé, blasted the DIP financing as "predatory" and likely to result in a "forced liquidation." It singled out an eye-popping "enhancement fee" of 37.5% of any sale proceeds remaining after paying the DIP facility and other fees and interest charges.

Related Articles

Barneys filed a revised financing package with the court Sept. 3 that includes key concessions to the creditors' committee. The revision slashed the enhancement fee to 25% and stipulated that it won't get paid until after priority creditors are paid in full and unsecured creditors get $8 million. The changes also free up more cash for Barneys to keep operating as it races to shutter money-losing stores and line up a buyer by mid-October.

That process appeared to be heating up at the end of last month. Barneys' chief digital and technology officer, Katherine Bahamonde Monasebian, told Bloomberg that the retailer aims to emerge from bankruptcy with "a very strong, digitally focused partner," and the New York Post reported that London-based online fashion retailer Farfetch was closing in on a deal. Farfetch, however, put out a curt statement: "The story is incorrect—Farfetch is not acquiring Barneys New York."

As speculation continued to swirl, fashion industry sources with knowledge of Barneys' business, who spoke on condition of anonymity, outlined several potential paths to a sale. One includes a digital partner such as Farfetch. Another is a consortium including a brand purchaser, a financial firm tied to the vendor community and Barneys' landlords. Another option includes private-equity money, which has poured into the retail sector in recent years.

Declining fortunes

In court papers, Barneys blames rising rent, slumping in-store sales and a consumer shift to e-commerce for its voluntary Chapter 11 bankruptcy petition filed in New York's Southern District. Barneys, which is owned by funds affiliated with Perry Capital and helmed by CEO Daniella Vitale, aims to emerge from Chapter 11 by drastically downsizing, then selling. Richard Perry, Barneys' current majority owner, is a prominent financier whose hedge fund, Perry Capital, had $15 billion under management at its 2007 peak.

The retailer's top brass spent the months leading up to the filing trying to line up a buyer, and many potential bidders remain interested in running the store as a going concern, or for its intellectual property, according to court papers.

Barneys racked up revenue of $790 million at 22 stores last year, according to court documents, with long-term debt of $190 million and an additional $100 million in unsecured trade debts. Barneys' management now has a lot to do in short order to emerge from bankruptcy: exit bad leases, negotiate better terms with remaining landlords, line up a buyer and persuade gun-shy vendors, many of whom are owed large sums, to continue shipping merchandise. After a back-breaking rent increase, to $30 million annually, on its 9-story, 275,00-square-foot Madison Avenue flagship this year, Barneys is expected to explore subleasing some of that space. (Barneys' 4-story Chelsea flagship—the company calls all its nonwarehouse stores flagships—which opened in 2016, is 55,000 square feet.)

Barneys' top 10 unsecured creditors list is a who's who of luxury fashion, spanning New York City–based The Row and European powerhouses Gucci, Givenchy, Prada and Celine. Jenel Management, a co-owner with Ashkenazy Acquisition Corp. of the retail condo Barneys leases at 660 Madison Ave., is the largest unsecured creditor, with a claim of nearly $6 million.

Barneys' DIP financing deal stipulates that it must line up a binding qualified bid from a buyer by Oct. 22, receive court approval by Oct. 30 and close the deal by Nov. 2, according to court filings.

"Time is of the essence, especially given the milestones under the DIP Facility," Barneys said in a court filing. Barneys and Richard Perry's spokesman did not respond to a request for comment.

The time line may be strict, but creditors typically agree to extensions if the bankrupt company is making material progress toward a sale or other resolution, said Marc Hamroff, chair of the Financial Services Practice at Manhattan-based Moritt, Hock & Hamroff, who is not involved in Barneys' bankruptcy.

As of July 6, Barneys had assets of $457 million and liabilities of $377 million, according to court papers. Entering Chapter 11 protection allows a retailer to break leases, noted Patrick Collins, a partner in the bankruptcy and restructuring practice at Farrell Fritz, which is advising a Barneys creditor. Barneys plans to shutter 15 stores to focus on five flagships, including the ones on Madison Avenue and in Chelsea, two outlet stores and e-commerce.

Barneys is the latest case in a tidal wave of retail bankruptcies that has wiped out thousands of jobs and led to millions of square feet of vacant storefronts across the U.S. Through July, major retailers have announced more than 7,500 closures, surpassing the total for all of 2018, according to CoreSight Research. Job cuts from bankruptcies, mainly in the retail sector, are spiking too, up 40%, to nearly 43,000, through July, according to a report from outplacement firm Challenger, Gray & Christmas.

The iconic New York chain's workforce includes 2,100 full-time staffers and 200 part-time workers. Nine-hundred are union members. Court papers state that as Barneys slashes its store count, "a more efficient allocation of employees will present a significant opportunity for savings."

This is not the first time Barneys' has overexpanded, restructured and landed on the selling block.

The store's humble beginnings as a discount store for men's suits is the stuff of retail legend: Barney Pressman pawned his wife's engagement ring to fund a small Chelsea storefront in 1923. But Barneys' high-fashion heyday took shape in the late 1980s, when a New York City merchant prince with a discerning eye, namely Barney Pressman's grandson Gene, would visit up-and-coming Paris ateliers and pick out looks to sell on Barneys' shelves several months later.

Working with his father, Fred, Gene brought Giorgio Armani's apparel collection to the U.S. Celebrities including Andy Warhol and the cast of Saturday Night Live lent their sheen to the flagship on the corner of Seventh Avenue and West 17th Street. Simon Doonan's window displays helped define the brand and stoke demand for Dries Van Noten, Helmut Lang and other European imports.

But the era of savvy merchants discovering fabulous looks and sharing them with the fashion cognoscenti at a brick-and-mortar store is long gone. Today the formerly exclusive precincts of the runway and atelier are accessible to all 24/7, democratized by the smartphone screen. To bother setting foot in a store, consumers demand a unique and compelling experience.

Barneys reportedly spent over $250 million creating its lavish temple to high fashion at Madison Avenue and East 61st Street, which opened in 1993. A partnership with Japanese retailer Isetan Co. to fund expansion soured in the mid-1990s, and Barneys, laden with debt, spent nearly three years in bankruptcy. When the case concluded in 1998, Isetan won the Madison Avenue store, former creditors took over the company, and the Pressmans essentially exited. Barneys was sold in 2004 and again in 2007 in a highly leveraged deal to Dubai-based private-equity firm Istithmar. Mired in debt once more, in 2012 Barneys enlisted Blackstone Group and Kirkland & Ellis to engineer an out-of-court restructuring. The deal slashed Barneys' debt to $50 million from $590 million, with Perry Capital taking a 72% stake. The Yucaipa Cos. and Istithmar hold minority stakes.

Hard road ahead

The hurdles to a successful restructuring have only increased, for Barneys and for retailers in general. Following changes to the bankruptcy code in 2005, retailers face much tighter time lines for rejecting real estate leases.

In addition, the company entered bankruptcy in a weakened position, sources said. It leased too many retail locations at high rents rather than owning its real estate and alienated vendors with poor communication as payments slowed before the filing.

"I think one of the lessons is, Barneys should have made a substantial expansion in the real world in real estate," says Jeff Trexler, associate director of the Fashion Law Institute, who is representing some of Barneys' creditors. "It would have had assets to sell in high-end urban areas with high property values and probably wouldn't have needed to declare bankruptcy."

Court papers provide a glimpse of companies that made proposals for incremental financing before the Chapter 11 filing. The list includes "an investor group," "a specialty finance firm," "one of debtors' landlords" and "a potential purchaser of the debtors' intellectual property."

Finding a buyer is a top priority, but it won't be easy, as Barneys' failed effort to clinch a deal in the months leading up to the filing underscores. Larger luxury department store competitors, including Neiman Marcus, Nordstrom and Saks Fifth Avenue, which is owned by Hudson's Bay, have reportedly taken a look and passed.

"We are in the mergers-and-acquisitions business with a focus on retail, and we do not find there are buyers in the market who want to invest in and own legacy department stores or big specialty stores focused on fashion," says Richard Kestenbaum, a partner at Triangle Capital, who is not involved in the Barneys bankruptcy.

The brand, however, still resonates with consumers and designers. "Barneys has an established name, and high-end vendors would like to have them around," says one fashion-industry source with knowledge of the company's business.

Court papers detail Barneys' ill-fated recent expansion outside its core market into cities such as Rosemont, Ill.—where the concept did not draw shoppers—even as many older stores bled cash. The filing notes that each of the 15 stores on the chopping block has "historically operated at a loss," generating about $14.2 million in red ink last year. In making its case for jettisoning bad leases quickly, Barneys said rent on those stores could cost up to $2.2 million a month.

Rapid growth in its online sales could not offset the drag on earnings from unprofitable stores. Noting that it invested heavily in e-commerce, Barneys says online retail is a "profitable and promising revenue channel" that makes up 30% of sales.

Now Barneys is trying to return to its roots with a smaller retail footprint in markets that make sense. In addition to its Chelsea and Madison Avenue stores, Barneys aims to keep flagships in Beverly Hills, Boston and San Francisco, along with two outlet stores including at Woodbury Commons, north of New York City. Court papers note that the chain's 13 flagships generate well over 50% of annual sales.

Barneys is only the latest in a long list of famous retailers—including Sears and Toys R Us—owned by hedge funds or private-equity firms to land in bankruptcy court.

According to the Wall Street Journal, Richard Perry, who purchased his first suit at Barneys, tried to sell the business in 2016. That same year, he shuttered his hedge fund. His wife, Lisa, designs a collection carried at the chain.

The big question is what this legendary, nearly century-old New York brand should be today. On a recent Saturday evening knowledgeable sales associates welcomed a visitor to the Madison Avenue flagship. The power, success and beauty signified by luxury fashion were on offer in forms both quiet—a perfectly cut, sumptuously soft pale blue trench coat by The Row—and bold—Converse high-top sneakers encrusted with glitter.

Tables were available at its on-site restaurant, Fred's, famed as a magnet for celebrities and captains of industry, from Bruce Springsteen to Jack Welch.

Crain’s New York Business is the trusted voice of the New York business community—connecting businesses across the five boroughs by providing analysis and opinion on how to navigate New York’s complex business and political landscape.